Online Retail Prof. Marios Koufaris CIS 9444, Electronic Commerce Baruch College, CUNY Copyright ©2004 Marios Koufaris

US e-commerce retail sales (in billions) Source: U.S. Census Bureau

Why retail online? Retailers made several assumptions that didn’t hold (Laudon & Traver, 2001): – Assumption: Reduced search and transaction costs would attract customers looking for lower prices – Reality: Customers eventually went back to being value-driven and brand-driven. Prices online matched (or exceeded) those offline.

Why retail online? Retailers made several assumptions that didn’t hold (Laudon & Traver, 2001): – Assumption: The cost of entry to the online retail market was very low – Reality: The cost of establishing a successful online retail company is very high, driven by web site technologies, logistics, distribution, fulfillment centers, marketing plans, etc.

Why retail online? Retailers made several assumptions that didn’t hold (Laudon & Traver, 2001): – Assumption: With lower prices and higher efficiency, online retailers would drive offline retailers out of business – Reality: Offline retailers were able to leverage their existing business, cash, expertise, brand, customer base to drive online retailers out of business and establish themselves online as well.

Why retail online? Retailers made several assumptions that didn’t hold (Laudon & Traver, 2001): – Assumption: In some industries, there would be complete disintermediation allowing manufacturers to directly sell to customers through the web – Reality: Though some manufacturers do sell directly to customers, the distribution channels have largely remained intact

The evolution of online retail Small independent online retail stores appear: – Amazon.com, CDnow.com Through growth or merger, large online retailers develop: – Amazon.com, Cdnow + N2K Meanwhile, existing retailers develop online presence: – barnesandnoble.com, WalMart.com What used to be search engines now become portals with online retail: – Yahoo.com

The evolution of online retail Niche retailers appear and are often bought by larger ones: – Drugstore.com Click-and-mortar retailers appear to have the upper hand – Wal-mart.com, Land’s End Many online retailers spend all their cash and never make profit forcing them to close: – Pets.com, Eve.com, etc. Today the established online retailers are profitable: – Amazon.com

Best selling products online Computer hardware/software, Travel, Books, Music, Toys, Collectibles/Antiques, Flowers/cards/gifts Why these?: – Information intensive goods – Researched purchases – Non-experiential goods – Non-perishable goods – Tech-savvy are more likely to buy them Source: Laudon and Traver, 2001

Online Retail Business Models Mix high and low margin items: – Kozmo sold low margin items for too long before they introduced high margin items, too late Difficult to depend on advertising only: – ONSALE AtCost tried to sell computers at wholesale and depend on advertising and s&h for revenues but failed Start with appropriate products: – Amazon started with books, built brand, and is now selling everything else

Online Retail Business Models Find a niche: – Companies like Cufflinks.com and yoyouniverse.com specialize in niche products hoping to: Build a large niche product business or Expand into other products or Be bought out New models can be risky but profitable: – Consumer Auctions (eBay), buyer-set price (Priceline)

Online retail business models Mass Customization: – Enable the consumer to customize their product – Turn commodities into luxury goods without raising prices – Customer value co-creation – Appropriate when production costs are low – Web consumers expect more personalized service – Can result in : higher customer loyalty fewer returns – Many consumers might customize the product but not buy it

Microsites / Branding websites Used for interaction with the brand – Nikelab.com, BMWfilms.com Possible since more users have broadband access Increase brand awareness, message association How successful for sales?

Online Retail Business Models Gifts: – Online gift market could reach $36 billion by 2005 (Forrester) – People may pay higher prices for gifts (guilt?) – Recommendations online make gift buying easier – Wish lists – Opportunities for niche selling – Buying gifts online frees customer from gift sending process (wrapping, mailing, etc.)

Online Customer Switching Costs Do consumers have higher or lower switching costs on the web? – Online customers are much more sensitive to small switching cost increases – different benchmarks How can retailers raise switching costs? – Value added information – ‘one click’ checkout – membership/loyalty benefits (miles, etc.) – increase security/privacy - reduce hassle

Unplanned Purchases Online For unplanned purchases: – a customer must be exposed to other products, marketing promotions, advertising, etc. However: – on the web, customers have unprecedented control over what they see and do, including the ability to skip promotions and advertising How can online retailers deal with this conflict and increase unplanned purchases?

Breadth...? Huge online department stores? – Demand side advantages: Lower search costs for customers – One stop shopping Bundling economies (e.g. shipping discounts) – Supply side advantages: Economies of scope Bundling economies Higher sales from impulse purchases; Cross-selling

...or Depth? Large specialized stores/ vertical markets? – Demand side advantages: Increased quality of product Better service, more knowledgeable service More variety within product – Supply side factors: Economies of scale Inventory and distribution efficiencies Targeted customer base Better ability to up-sell